Ah, Forex trading…
A lot can go right, but a lot can also go very wrong very fast. It is important to truly know your ins and outs of the industry and how to trade. It is easy to learn what to do by using educational materials, but the lingering question remains on what are common Forex trading mistakes you can avoid without learning the hard way.
The Pearl Lemon Invest team wants you as a trader to be successful in your trading endeavours. This means as we give you tips and tricks on what to do and different trading techniques or strategies, we also want to let in on a few common mistakes in Forex trading.
Photo Credit: Forex OP
Backing Out Too Soon
One Forex trading mistake people make is letting their emotions take over and they end up backing out of trading too soon. A loss does not mean you should stop trading and take the hit and count your Forex adventure as a fail.
Your alternative is that you should keep trading. Maybe just tweak your overall strategy to have a little less risk and be more diversified, but pulling back from trading could lead you to lose on potential gains after.
The market naturally has its ups and downs; everyone has losses and gains, so take this advice and really think about if you want to ride out a low to recover or if it is truly too much to handle.
Leaving Out Stop Losses
Now, this common mistake can go hand in hand with the previous one. Using stop-loss orders helps take away some of the risks that can be associated with Forex trading by making an exact point in which to stop trades if the market starts moving against your trades and losses start to occur.
By leaving these orders out of your Forex strategy you are allowing your portfolio to be exposed to that much more risk. There is no cap at the loss you can have, so the overall loss that can occur will simply be that much greater.
So, be sure to use these orders, especially if you want a risk buffer in place to continue making trades.
Averaging Down When Losing
Again with needing to use stop losses, if you average down to a losing trade then you can potentially lose a large amount of money. By adding to a current loss, some people think that it will help the trend reverse and you can begin making gains again. This is far from the truth, the market can easily CONTINUE to move against you and in turn, all you ended up doing was feeding the fire that is causing a loss.
Instead of throwing gasoline on the fire, just ride it out and let it die down. Only to trades when you see the market turning so you can begin to make gains again. Trade smart and have a strategy, don’t react out of emotion and panic.
Too Much Risk Per Day
Some people simply allow too much risk to be attached to their portfolio. Specifically, we are talking about the people that end up risking more than they can afford to lose… much like a gambling problem. You cannot assume that you will make bank and win enough to offset the abnormally high risk you are allowing.
Even risky traders should not exceed a 3% loss rate per trade each day. By allowing for more risk or loss percentage to be a part of each move, there is greater potential to lose it all and in turn, you will end up having to leave your Forex trading journey behind.
Too Much Risk Trying To Recover
I think you can spot a trend here with these common Forex trading mistakes involving taking on too much risk in one shape or another. This common mistake is no different, but unlike the other mistakes, this involves risk when trying to recover from a loss.
Again, do not get too emotional. Many traders will pile on too much risk with trades after a loss on their account. This is in an attempt to quickly and fully recover from the loss and still show an overall gain.
Do not do this though. There may be a slim margin you can recover, there is a greater risk that this will backfire and cause massive losses that will not be able to be recovered from at all. Accept you had a large loss and develop a low to medium risk strategy to recover instead of trying to fix it fast.
Jumping Ahead With The News
Now the news, especially with large economic or social events, can impact all investing markets from stocks to currencies to bonds and more. Do not try to predict what will happen to the market based on a recent event or press release that the news showcases.
Depending on the event there can be a sharp change in direction that is temporary, there may be no reaction shift, or there can be a long-lasting shift. Look for the indicators on what exactly will happen rather than trying to jump the gun and take a guess.
There may be an off chance you will be right, but there is a greater chance you will completely miss the marker, especially if you are not an industry expert. So by all means, it is great to keep up with the news and world events concerning how those impact world economies and currency values, but don’t use that as your main or sole indicator for market movements.
You Pick The Wrong Partner
Now we all make mistakes in picking partners, but in Forex a common mistake is trusting your account and funds with the wrong Broker.
Although there are plenty of reputable brokerages out there you can go through to have your Forex account connected through, there are also plenty of scammy brokerages out there that will end up taking your money and leaving you in the dust.
Do your research! Look for reviews, press releases and more on the brokerage you may be thinking about before jumping right into that relationship. Making a wrong choice here can set you up for failure in the end and you can kiss all of your funds goodbye.
Diversifying Your Account The Wrong Way
In any trading strategy, diversification helps avoid putting all your eggs in one basket. As we all know this is a dangerous choice because if anything fails, the entire account will go under.
A common Forex trading mistake with diversification is placing too many trades for the same time or during the same day. This does the opposite of positive spreading, this instead increases your overall risk because too much is going on at one time and in turn can cause greater losses. Many traders do this accidentally by placing too many movements that end up correlating with one another so when one fails, they all fail.
Looking Only At Economics
The news and changes within the economy does and will have an impact on the market and how currencies are valued against one another. A Forex trading mistake made here is that some traders rely too heavily on what is happening with the economy and not their FX indicators within the charts.
Looking at just economics can lead to rash or wrong decisions as it revolves around the news, so it is not a reliable sole indicator for what moves a trader should make. This ultimately means wrong indicators will be looked at and the market can easily move against what a trader will expect, especially if you as a trader are not an expert in the field of economics and finance.
Going In Blind
How many times have you gone into an event without any sort of plan besides you are going to do it? How many times has that actually ended up being one-hundred percent successful?
Pretty slim success rate right?
Well Forex is just the same as any other action without a plan. You absolutely must have a plan before you start investing. By failing to plan, you are simply planning to fail. You need to know what trading strategy you are going to use and what other moves you may make.
By not having a plan, you have a complete crap-shoot and who knows how successful you will be…likely you will have massive losses rather than making the monumental gains you are hoping for.
You need to research strategies, find what will best suit you and keep consistent with your plan as long as it continues to be successful.
All in all, many common Forex trading mistakes are rooting in who you are as a trader. You must be knowledgeable and commit to research and learning, as well as, condition yourself to not react based on emotion.
By eliminating these factors and training yourself to be better, you can avoid some of these mentioned top common Forex trading mistakes.